Oakland receives Fitch downgrade as city flirts with insolvency

Oakland, California’s financial turmoil and turnover in leadership have resulted in the city’s bond rating being downgraded to A from AA-minus by Fitch Ratings.

The outlook was revised to negative. The city had $821.7 million in bond debt, according to its most recent audited financial report for year-end 2023.

“A city report released on Nov. 19 by the financial management team stated immediate action is necessary to avoid beginning the Chapter 9 process,” Fitch analysts wrote. “This report has been replaced with another still calling for immediate action to maintain solvency in the general purpose fund, but omitting any reference to bankruptcy or Chapter 9.”

The projected deficit for fiscal 2024, ended June 30, is $79 million, about 10% of adjusted budget expenditures, while the preliminary projected deficit for fiscal 2025 is $93 million, nearly 12% of adjusted budget expenditures, Fitch analysts wrote.

The original fiscal 2025 budget of $807 million included revenues of nearly $60 million from the potential sale of the Oakland Coliseum.

“The two-notch downgrade of the city’s issuer default rating to A reflects the notable projected general fund budget gap for fiscal 2025 and future years,” according to Monday’s report.

In an interview Fitch Senior Director Pascal St. Gerard said he doesn’t know at this point if the city’s rating could fall to junk, because it depends on what actions the city takes. The rating agency will know more when the city releases its year-end finances expected by the end of December, he added.

“I am not in the business of proscribing what they do,” St. Gerard said. “But, the longer they go without taking action, the more the problem grows.”

He added that he has not seen the city come out publicly with a plan related to layoffs, though they have implemented a hiring freeze.

“Cities in this situation do tend to go after the low-hanging fruit first and then make additional expenditure reductions,” he said.

What put the city on this path was the expectation of payments related to the sale of the coliseum, he said. At this point, the city is still negotiating as far as he knows, but that funding won’t be available to fill the hole in 2025, as expected.

Despite its current problems — including the loss of three professional sports teams in recent years — the city has a strong economy and benefits from its position as the San Francisco Bay Area’s third largest city. It is also host to a large port and international airport.

“The financial position is more a function of historic practices and relying on one-time revenues,” St Gerard said. “At some point, there is no more one-time financing available to finance expenditures over the long haul.”

A combination of things impact the city including homelessness, and like San Francisco, the downtown hasn’t really recovered from the loss of foot traffic caused by the pandemic, he said.

“If they had cut staff or acted earlier, they might be in a better position,” he said.

Also on Monday, Fitch downgraded the city’s sewer revenue refunding bonds to AA from AAA affecting $15.8 million in debt. It also assigned a negative outlook to that debt, citing the city’s fiscal situation. The sewer revenue rating is capped at three notches higher than the city’s issuer default rating under Fitch’s criteria.

The port city benefits from a large and diverse service-based economy that is growing rapidly amid a boom in the region’s technology-driven economy, Fitch analysts wrote.

The outlook revision reflects “the uncertainty regarding the magnitude of the reductions in the city’s unrestricted fund balances, which were $311 million or 33% of spending at fiscal end 2023,” analysts wrote. “It also considers the timing needed for right-sizing of the operating budget to avoid significant reserve drawdowns and a weakening of financial resilience.”

Leadership turnover has also “heightened the city’s financial vulnerability,” Fitch wrote.

Oakland Mayor Sheng Thao and Pamela Price, the Alameda district attorney, were both ousted in recall elections, sowing turmoil.

Both were the target of recall campaigns, sparked by discontent over the city’s challenges, which include a housing crisis, rising costs and the departure of the city’s last remaining professional sports team with Major League Baseball’s Athletics relocation to Las Vegas finalized in November.

The recall campaigns focused on a surge in violent and non-violent crime in the wake of the pandemic. The surge of discontent came even though statistics showed crime numbers falling as homicides dropped 30% this year and robberies were down 20%, compared to last year, according to The Guardian.

Last week, Sherry Jackson, the city’s revenue and tax administrator, stepped down.

“The eight-seat city council will have three new members and a fourth is possible as the current council president is projected to win a seat on Alameda County’s Board of Supervisors,” St. Gerard said.

There would be more continuity if the council president remained, because she would have been named interim mayor. But instead, the City Council will have to name a new council president, plus they have three new council members who will have to get up to speed, he said.

The mayor is expected to step down once election results are certified in December, with a special election to follow within 120 days.